The Option Investor Newsletter Tuesday 5-16-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-16-2000 High Low Volume Advance Decline DOW 10934.60 + 126.80 10971.20 10816.00 951,590k 1,672 1,267 Nasdaq 3,717.57 + 109.92 3729.12 3626.99 1,497,969k 2,329 1,749 S&P-100 784.23 + 7.70 787.61 775.67 Totals 4,001 3,016 S&P-500 1466.04 + 13.68 1470.40 1450.76 57.0% 43.0% $RUT 505.98 + 8.17 507.52 497.81 $TRAN 2865.27 + 27.23 2885.24 2841.03 VIX 26.71 - 0.74 28.21 25.98 Put/Call Ratio .63 ****************************************************************** We Got What Was Expected, Yet Uncertainty Prevails Well, we finally got it. There is no longer any uncertainty as to what the Fed will do...until next month. And hopefully the CBNC hype will subside. Today, the FOMC proved their vigilance in fighting inflation by serving up a 50 basis point rate hike for both the Fed Funds and the discount rate. Widely expected, overly hyped. This has been priced into the markets since late-April when they began their slow declines on light volume. The question still remains, do we need a 50 basis point hike? This is the biggest rate hike in five years. It is interesting to look at because the fear of 50 all started when last month's PPI and CPI came in higher than expected. All of a sudden, the paranoid inflation-watchers began screaming armageddon. Next thing you know, everyone's talking about a 50 point hike and it became the expectation, and eventually a self-fulfilling prophecy. Why? Because if the Fed didn't raise by 50 and investors thought the Fed was getting behind the yield curve, the markets would have reacted quite negatively. Yet, I would like to point out that last Friday's PPI was in line and today's CPI was benign. The point is that when looking at these inflationary data reports, it is important to look at the trend and not to put so much merit in an anomaly. Last month's increases were a blimp on the map. The uncertainty for May has been quenched but talk about what the Fed will do in June is already heating up. Along with the rate hike came some fierce rhetoric from the FOMC, stating that they will continue to be aggressive. So will the volume come back now? Has enough certainty returned to our markets? This brings me to the market's reaction. In regards to yesterday's NASDAQ turnaround late in the session, a trader said it was the rally before the rally. And today, we opened higher and flat-lined prior to the Fed announcement. On the positive side, volume was a bit stronger in the morning. As we fought off heavy eyelids until 2:15 EDT, nothing was happening in the market. The bets had been made and the waiting game began. The NASDAQ was holding on just above the 3700 level and the DJIA was strong at the 10900 level. There was nothing but green on the NASDAQ ticker, showing many tech favorites up $4, $7, $9. With great anticipation, 2:15 EDT rolled around and the expected became certain. It was the typical, "Buy the rumor, sell the news" trading, and both markets took a dip down. Which way we would go was as uncertain as you get, with the bulls and the bears battling it out. So who won? Well, both indices finished up on the day almost exactly where they were right when the Fed announced. The bounce was nice to see but the volume still continues to be the main concern. Volume on the NYSE was 950 mln, not too impressive. NASDAQ volume was 1.46 bln. We're still waiting for the good ol' days of NYSE 1 bln and NASDAQ 2 bln. Looking at the DJIA chart, we can see that the Industrials have made a quiet rally since last Wednesday's low of 10292. Having climbed over 600 points on four consecutive up-sessions, the DJIA tacked on 6% and is approaching formidable resistance at 11000. DJIA ended up 126.79 to 10930. DJIA standouts included HWP(+5.00), IBM(+4.81), and MMM(+4.13). As for the NASDAQ, it was encouraging to see it hold the 3700 level throughout the day. Even after the post-rate hike dip which bounced from 3626, the NASDAQ managed to claw its way back above 3700. Notice how choppy trading has been given the weak volume on the NASDAQ. Less volume means more dramatic moves. It continues to trade in a range and will continue to do so until strong volume returns. And with the summer nearing, the return may be further off then thought. Well, as we patiently await the return of volume, we have seen some increased activity in the merger and acquisition business lately. Today, Terra Networks(TRRA) announced that it will be buying Lycos, Inc.(LCOS). The Spanish Internet group offered $12.5 bln in stock for the U.S. Internet search engine, which will create one of the world's largest Internet companies. In a bid to expand its global reach, this merger will allow TRRA to target 30 mln Spanish-speakers in the U.S. Once completed, the combined company will be called Terra Lycos, Inc. and will have an estimated 50 mln unique users. They will have operations in 37 countries. LCOS closed at $72.63, up $11. TRRA fell $3.31 to $53.56. With late-season earnings, HWP came out after the bell and beat the Street estimates by five cents, posting 2nd quarter earnings of $0.87 per diluted share. Revenues rose 15% to $12 bln from $10.5 bln in the same period one year prior. The company attributes this increase to its notebook revenue and unit growth year-over-year. Although a good earnings report, HWP was down in after hours trading by $3 to $137. HWP's recent spin-off company, Agilent(A) also posted earnings after the close. Their net earnings came in at $166 mln, or $0.36 per share, including a one-time gain. Minus that gain, earnings were $0.32 per share, in line with analysts' estimates. Agilent manufactures testing equipment for Internet service providers and chip makers. HWP still holds an 85% stake in the company and is expected to distribute those remaining shares in early June. Agilent rose $7.81 to $96 in today's trading. It appears that some life may be coming back to the markets as companies continue to show good earning's growth and venture back into the merger and acquisition market. We finally got what we were waiting for: a 50 basis point rate hike. The market's reaction to this announcement today exemplifies investor indecision as to where they should take the market next. Look for both the DJIA and the NASDAQ to continue their range-bound trading. During these choppy trading times, utilize support and resistance levels in helping choose entries and exits. Watch for strong volume to confirm any breakout moves. Even though we got the rate hike, there is still uncertainty in the markets. Uncertainty breeds volatility and volatility equals trading opportunity. Remember, there's nothing wrong with taking profits, no matter how small, and cut your losses early. Matt Russ Research Analyst *********** IN THE NEWS *********** Brocade Soars on Better-Than-Expected Results By Cindy Christ Fibre channel switch maker Brocade Communications Systems rocketed more than 13 percent Tuesday, delivering the monster results investors had come to expect before the tech wreck halted the Nasdaq's spectacular rise. Shares in Brocade (BRCD) closed up $11.06 at $126 after trading up to $130.50 intraday and gaining nearly $9 in after- hours trading Monday. After yesterday's close, San Jose, Calif.-based Brocade posted second quarter earnings of 11 cents a share, beating Street estimates by 3 cents and reversing a 1 cent loss in the same period last year. The leading supplier of components used in storage area networks called SANS reported net revenues of $62.1 million, up 489 percent from $10.5 million a year ago. Used to connect computer equipment holding massive amounts of information generated by Internet- and data-based networks, storage area networks are among the hottest areas of technology. Second quarter net income totaled $13.3 million, up $14.2 million from a net loss of $800,000 for the same period in 1999, and an 82 percent increase from $7.3 million reported in the first quarter. During the second quarter, Brocade produced $15.1 million in cash, with total cash and short-term investments at April 29 totaling $111.5 million. Gross margins, a percentage of sales less production costs, jumped to 58 percent from 53 percent in the first quarter. The company said the margin improvements were mainly due to increased shipments of its SilkWorm 2400 and 2800 products and higher sales to system integrators, which accounted for more than 25 percent of total revenues, up from 5 percent a year ago. "We are pleased to deliver to our shareholders the fourth consecutive period of quarter over quarter revenue and earnings growth," said Greg Reyes, BROCADE president and chief executive officer, in a press release. During the quarter, Brocade signed up six new original equipment manufacturers as customers, including EMC Corp., Hewlett-Packard, IBM, Intergraph, NCR and Unisys. The company said its SilkWorm switches are now sold by 17 providers selling more than 90 percent of the world's external storage systems. Brocade's SilkWorm switches and software connect servers with storage devices through a fibre channel SAN, allowing companies to access and share storage. On Tuesday, Robertson Stephens communications and networking analyst Paul Johnson raised his earnings outlook for Brocade based on the firm's strong second quarter showing. Johnson boosted his earnings per share estimate for 2000 to 46 cents from 34 cents, and to 70 cents from 44 cents for 2001. "We believe the strength in the quarter was due to continued strong growth in sales of fibre channel based storage equipment and the building momentum of the company's systems integrator business," Johnson wrote in a research note. "In the first calendar quarter, Brocade continued to take market share with 68 percent of the fibre channel systems business, and 38 percent of the overall fibre channel market," he added. ************** MARKET POSTURE ************** As of Market Close - Tuesday, May 16, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,000 11,400 10,935 Neutral 5.05 SPX S&P 500 1,400 1,500 1,466 Neutral 5.05 OEX S&P 100 750 800 784 Neutral 5.05 RUT Russell 2000 450 550 506 Neutral 5.05 NDX NASD 100 3,200 4,000 3,647 Neutral 5.05 MSH High Tech 860 1,000 950 Neutral 5.05 XCI Hardware 1,360 1,600 1,444 Neutral 5.05 CWX Software 1,100 1,300 1,258 Neutral 5.05 SOX Semiconductor 960 1,200 1,047 Neutral 5.05 NWX Networking 900 1,100 1,053 Neutral 5.05 INX Internet 550 800 639 Neutral 5.05 BIX Banking 530 600 564 Neutral 5.11 XBD Brokerage 400 500 478 Neutral 5.05 IUX Insurance 540 620 643 Neutral 3.16 RLX Retail 900 1,000 927 Neutral 5.11 DRG Drug 355 400 388 Neutral 4.28 HCX Healthcare 710 800 793 Neutral 4.28 XAL Airline 140 155 150 Neutral 3.10 OIX Oil & Gas 265 300 307 BULLISH 5.11 Posture Alert As expected, the Fed raised rates by 50 basis points, and the relief rally continues. Most sectors participated in the rally; however, the Internet (+5.03%), Software (+4.05%), Morgan Stanley High Tech (+3.96%), and the NDX (+3.83%) led the way. The only loser for the day was Oil & Gas (-1.32%), but this sector has enjoyed a nice rally as of late. With this most recent action, we have upped Insurance to Bullish from Neutral. **************** MARKET SENTIMENT **************** Tuesday, May 16, 2000 Just What the Doctor Ordered! The markets have started off the week on a solid note, as investors' bid up shares even in anticipation of an interest rate hike. The relief rally is just what the doctor ordered, as numerous beaten up sectors enjoyed solid gains. After the expected rate hike this afternoon, the markets behaved erratically as indexes seesawed dramatically while the market pundits interpreted the "Greenspeak" from the Fed. The Fed used strong language to indicate that they would stay ahead of the curve, which momentarily stalled the market out of fear. However, with two more interest rate hikes factored into the market already, these comments should not have been surprising, which is why the market closed near the highs of the day! Looking ahead, the sentiment is still leaning in favor of the bears, which from a contrarian stand is positive. The overall put/call ratio stood at .63 today, while the equity put/call stood at .52. Both of these numbers have been and are still in bear territory. When looking at these statistics for the last several weeks, we continue to believe that a more meaningful rally will ensue. Whether it's this week, or after option expiration remains to be seen. However, with the latest round in corporate earnings being positive, as well as merger activity in the internet sector (Lycos, Terra Networks) we may see more follow through the remainder of this week. Regardless, too much focus has been placed on this Fed Meet, and now that it is over, we can start concentrating on other issues. Now don't get us wrong, every major economic indicator will still be extremely important; however, the skies are starting to clear from the Fed Storm Cloud. Have a good week! BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. Hewlett-Packard and Dell Computer are the latest bellwethers to beat expectations. Short Interest (NYSE): Short interest on the NYSE fell 1.33% to 4,055,931,190 shares on April 14; however, this is still a high level and from a contrarian viewpoint, would be considered bullish. Mixed Signs: Volatility Index (26.72): Up until recently, the VIX has proved that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. The VIX may now be attempting to get back to the old trading range. BEARISH Signs: Interest Rates (6.106): With the long bond breaking significant support levels, new highs may be attempted in the near future. Liquidity Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. IPO Dilution: With so many IPO's hitting the market, there seems to be dilution occurring where shares of finally freed up to sell by insiders. $58.6 billion of stock was freed up for trading in March, $67.3 billion April, and $118.3 billion in May. This is too much stock for the system to handle. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. Investor Expectations: More and more investors are now expecting high double-digit growth if not triple-digit expansion in their portfolios. This extreme positive sentiment could help fuel a future sell-off in technology shares. ***************************************************************** The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ***************************************************************** OEX Friday Tues Thurs Benchmark (5/12) (5/16) (5/18) ***************************************************************** Overhead Resistance (805-830) 6.65 9.86 Overhead Resistance (775-800) 2.06 2.40 OEX Close 761.67 784.23 Underlying Support (745-770) 1.46 1.76 Underlying Support (715-740) 8.74 10.33 What the Pinnacle Index is telling us: Based on the above statistics, direct overhead resistance and direct underlying support both remain light, while OTM support and resistance levels are extremely strong. Should this relief rally continue, the 800 level poses significant resistance in the short term. However, after expiration this week, we could be in for a more significant rally. Put/Call Ratio ***************************************************************** Friday Tues Thurs Strike/Contracts (5/12) (5/16) (5/18) ***************************************************************** CBOE Total P/C Ratio .53 .63 CBOE Equity P/C Ratio .44 .52 OEX P/C Ratio 1.38 1.10 Peak Open Interest (OEX) ***************************************************************** Friday Tues Thurs Strike/Contracts (5/12) (5/16) (5/18) ***************************************************************** Puts 700 / 7,010 760 / 10,554 Calls 800 / 10,855 800 / 10,319 Put/Call Ratio 0.65 1.02 Market Volatility Index (VIX) ***************************************************************** Major Date Turning Point VIX ***************************************************************** October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 April 14, 2000 Bottom? 39.33 May 16, 2000 26.71 ******************* OPTION CLUBS UPDATE ******************* SACRAMENTO OPTIONS CLUB UPDATE I would like to make you aware of our club and meeting times. It may help other option investors in our area to come join our group. The Sacramento Investment Network(SINE), as we call ourselves, meets twice a month. We have a breakfast meeting on the Sat. after options expiration Fri. and a mid- month night. We are dedicated to learning more about options trading and enjoying the comradeship of people who have a common cause. We have a dedicated core group of people, who come from varied backgrounds. We can be contacted at: ***** BOSTON OPTIONS CLUB UPDATE May 25th: TOPIC: Low Risk, High Profit Trading in A Volatile Market or Market Crash Atmosphere (Spreads for every occasion) TIME: 6 - 10 pm LOCATION: Burlington Marriott, Route 128 CONTACT: Tickets & Info --Kim Lemaire, -------------------------------------- June 10th: Secrets of a Successful Professional Trader in a Volatile Market (Stocks and Options) Crowne Plaza Hotel, Woburn, MA, 10 - 4 pm --------------------------------- July 15th: Roger Perry, Founder & Author, The Rightline Split Report: Splits in a Crazy Market Crowne Plaza Hotel, Woburn, MA Seating is limited at all 3 events CONTACT and TICKETS: Kim Lemaire, BOIC or email at: ************ WOMANS WORLD ************ Bullish Put Credit Spreads By Mary Redmond If you have a bullish outlook on a particular stock or index sometimes you can make as much money by selling a put as you can by buying a call. The reason this is true is that very volatile stocks will have expensive call and put options. When you buy a put you buy the right to sell 100 shares of the underlying stock at the strike price of the put any time at or before expiration. You pay a certain amount (the premium) for this right. When you sell a put you give someone else (the buyer) the right to "put" the stock to you at the strike price any time at or before expiration. You are obligated to buy the stock in this situation. For example NT at 55.5 has a June 55 put priced at 4 1/8 to 4 3/8. If you sold the June 55 put at 4 1/8 then if NT were below 55 the Friday before the third Saturday in June you might be obligated to buy the stock at 55. That would be ok if you wanted to buy it anyway, because you could lower your cost by 4 1/8 points. The danger arises if the stock drops catastrophically when you are obligated to buy it, in which case you either sell at a loss or wait for it to go back up. Most brokerage firms do not allow naked option writing unless you have at least a six figure account and option experience. Most do not allow options trading in IRAs for a similar reason. If you were to sell the put without having enough money to buy the stock the brokerage firm would take the potential loss. A somewhat safer alternative is to use put credit spreads. This can give the opportunity to profit from overpriced put options while limiting your potential loss. In a spread, you buy one option and sell the other. If there is a credit from the put spread then it is bullish. For example, with the NT at 55.5, the June 65 put is 10 5/8 to 10 7/8. If you thought the stock would be above 65 by the Friday before the third Saturday you could buy the June 55 put at 4 1/8 and sell the June 65 put at 10 5/8. You would receive 6.5 points minus transaction fees. This is your maximum potential profit. The maximum potential loss would be the difference between the two strike prices (10 points) minus the credit of 6.5, or 3.5. This is because if the stock tanks to below 55 in June you would probably be assigned and have to buy the stock at 65. You could exersize your put and sell the stock at 55, even if it were way below that level, thus keeping your risk to a minimum. Generally speaking, it is best to close spreads the Friday before expiration if there is a question about whether the options will be assigned. This saves any surprises on Monday morning after expiration. One advantage of put credit spreads is that put options may move more quickly than call options if the stock rises. In other words, you might make a higher profit faster from a put credit spread than a call debit spread. The reason put options on volatile stocks are frequently very expensive is that the market makers take offsetting trades almost every time they fill an order. For example, the NT June 65 call is 1 to 1 1/4. If you sell the put, the market maker buys the put, and will most probably buy 100 NT and write the June 65 call. The market maker's locked in profit in this case is 6500 - 5500 + 10 5/8 - 1 1/4, or 6500 minus 6437.5. Many people in the media have been speculating about the impact of the Fed's rate hike decision on the Euro. This is a topic which will probably be watched very carefully, as continued rate hikes could impact the Euro and other currencies. It is surprising that the GDPs of most of the major European countries have actually done well during the Euro's decline. In fact, the economy of the entire Euro area increased by approximately 4% in the second half of 1999. However, despite this growth, America's growth is still far stronger and money has been flowing out of Europe into the US markets. A weaker Euro may have actually benefitted some European industries, as it can increase the demand for European made goods in world markets. However, a Euro which is too weak against the dollar might throw their countries into a recession, which could back fire on the US, since many of our companies export their products to Europe. Some analysts think that the Euro may strengthen against the dollar if the perception is that the US economy is slowing. The critical balance is one more factor to watch in the coming months. Contact Support ************** TRADERS CORNER ************** Mail Bag...Odds & Ends By Austin Passamonte Let me start by saying all the e-mail I receive is appreciated. Regretfully, it is impossible for direct response to each and many times the same topic overlaps. Therefore, let's touch on a few of them in this forum. First of all, I am not personally affiliated with Pinnacle Capital Group in any way. Austin Tanner heads it, and I understand the name confusion. Sure would be a lot easier if my mother had followed her first instinct and named me "Jeff". Let's blame our identity mix up on my mom, shall we? That being said, I have no control over the Skybox site, contents or anything else affecting it. As an independent trader just like you, I can only follow the action that unfolds. I have no idea why certain trades may be taken or missed depending on option pricing at the time of execution. The Skybox for me at this time is an important guidance tool for trading the OEX. Clearly there are plenty of different questions many traders have that occur on a daily basis. To be fair and honest, the very best way to familiarize & learn the Skybox system is the same way I did; watch, observe and study actions & results over a period of time. I'm certain that's not the answer anyone wants to hear... we'd all like to just plow in and have at it. Trouble is that can be a fast track to broke without an internal understanding behind our action. I will continue to address OEX & Skybox trading in my weekly articles every Monday & Tuesday. All questions are kept and will be included down the road. My absolute best advice until then is the same I gave myself; be patient, watch and learn over time. You'll surprise yourself how easily the puzzle pieces fit together once you allow the learning process to unfold. I've been directional trading the OEX for awhile. This subjective trading allows me choice to pass up trades like put positions triggered during a rising market such as Tuesday's. I'm inclined to simply watch the index as it rises into a bearish trigger when all market signs are positive for a rally. Should the index stall near that point and break back down, I'll likely jump on the put play then. If the market rise through the bearish trigger AND trade through the bullish one in a rallying market I'll take the OEX call play if option prices are in line. I can't say this is a better method of trading the OEX than Skybox verbatim, it just happens to fit my lifestyle right now. I will readily admit I've missed some profitable moves the Skybox captured. A trader following Skybox needs to watch the market every single minute from open to close, or a trading partnership can team up to monitor the action. Currently we're exploring the latter strategy for Skybox methodology and others with great promise and less risk. Also, the money-management system I prefer to use performs best in directional trading. The strategy of buying options with 75% of available balance adjusted after each trade is designed to protect traders from large drawdowns and maximize big gains. It works completely different from conventional methods using 10%, 20% account balance or X-number of specific option contract strategies. These are all fine but pale in comparison to leverage results the 75% multiplier offers. A skilled, disciplined trader who can execute such a system has the opportunity to multiply an account to percentages you'd never believe without testing it yourself. Although designed to keep pro Blackjack players alive through many small losses to capitalize on few big wins, it works even better with few actual losses of course. I've been studying the use of trailing stops in my OEX trades with favorable early results. More on that in the future when sufficient data gives us something solid to discuss. There still remain some OIN readers who cannot locate the Skybox link on their website access. It should be on the front page in the left-hand column under the green "Strategies" header. If your home page differs from this, please contact OIN for further details. Sure is plenty of interest from international traders for the OEX as well. Seems to be quite a challenge finding brokers that can handle trading needs outside the U.S. Sadly, I have no way of recommending any brokers foreign traders might use. It is beyond my scope to do so. Glad to see many OIN traders are avid book readers. I knew you were the cream of all option trading crops! I heartily endorse every book listed in the OIN Bookstore in the "Resource" section. Each one will add to your base of knowledge many times the paltry retail prices, for sure. On a philosophical note I was asked if option trading truly is a zero-sum game as I'd written. The honest answer is, depends! I would guess that many, even most options are written with defensive strategies in mind and therefore serve their purpose as the actual buyer profits from any appreciation. If writer and buyer are each happy with the results, it should be considered a win-win for both. However, the other side of this coin is the fact that unrealized gains are actually true losses. If an option writer loses money it's a loss. If the buyer enters late or sells too soon, it's a partial loss. Personally I'm thrilled just to take chunks of profit from any option trade and subscribe to the win-win theory. I'm pleased to learn that many new traders are in the midst of paper-trading their way to a higher education of the game. Hey, doctors, lawyers, CPA's, fighter pilots, police officers, you name it - they all simulate their profession for years. Can we take a page or two from those handbooks for professional success? I surely think so. It's no less noble to perfect your skills through virtual trading than a doctor performing the first few procedures on non-living subjects. Would you be comfortable with even the finest young surgeon fresh out of school performing their first procedure on you? Me neither! Why should we be compelled to jump in the financial arena with less classroom training than the brightest medical student has endured? Currently I'm researching a few trading strategies on paper and real time as mentioned before. One tactic is the proper use of trailing stops to eliminate some losses without choking out potential winning trades. I've managed to accomplish both so far, and will report fine-tuned results in the future. Debit spreads for the OEX & SPX and credit spreads for the SPX offer great risk/reward ratios for busy traders. The choice to select plays that don't need baby-sitting like straight calls & put plays on the OEX do is nice. I have some interesting figures compileded over the past two weeks to share next Monday & Tuesday. Having traded both straight plays and spreads, there are certainly times & places where spreads far outperform calls or puts. Again thanks for the mail and your thoughts are always appreciated. Looking forward to visiting with you again next week. Prosperous trading to you all! Best wishes. ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10934.57 198.41 126.79 325.20 Nasdaq 3717.57 78.59 109.92 188.51 $OEX 784.23 14.86 7.70 22.56 $SPX 1466.04 31.40 13.68 45.08 $RUT 505.98 6.87 8.17 15.04 $TRAN 2865.27 -35.98 27.23 -8.75 $VIX 26.71 -2.50 -0.74 -3.24 Calls Mon Tue Week RMBS 207.00 12.44 5.63 18.06 Moving up on good volume AFFX 155.13 -0.28 15.19 14.91 Surge of buyers today AMCC 113.50 1.69 10.50 12.19 Big move ahead of the Fed SEBL 140.81 8.88 2.94 11.81 Picture perfect breakout ALTR 92.63 3.32 5.25 8.56 New, looking for $100 JDSU 94.25 3.88 4.38 8.25 Trading with the Nasdaq PLXS 89.25 7.25 1.00 8.25 Bulls eye play!!! MEDI 172.03 -1.88 9.41 7.53 Splitting on Thursday SEPR 109.75 0.75 6.75 7.50 Multiple sector upgrades DNA 135.00 2.38 3.63 6.00 Has the DNA of a bull KANA 44.38 2.78 2.59 5.38 Dropped, time's up CDWC 123.00 1.25 3.50 4.75 Volume is staying strong WLA 120.63 2.13 1.31 3.44 Merger with PFE pending FLEX 56.25 4.50 -1.50 3.00 Held analyst meeting today BVSN 48.38 -0.25 2.88 2.63 Still trying to break $50 AMGN 64.69 1.81 0.50 2.31 Fighting for billions FAST 71.13 1.44 0.31 1.75 A major expansion agreement MSFT 69.50 0.56 0.13 0.69 Waiting for a breakout Puts OPTV 58.75 -2.00 -3.88 -5.88 New, down on big volume SBL 46.06 0.31 0.69 1.00 Running into resistance CMRC 49.25 2.25 2.63 4.88 Caution flags are raising FDRY 73.13 -0.69 5.69 5.00 Not convincing enough yet AKAM 76.06 4.25 1.31 5.56 Gapped up, but drifting PLCM 64.06 -1.38 7.06 5.69 Dropped, no play here NXTL 108.69 7.63 8.19 15.81 Dropped, none here either PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** KANA $44.38 +2.59 (+5.38) Today the writing was on the wall and we're not ignoring it. On one side of the coin, KANA opened strong and broke out of its tight consolidation channel of $38 and $42, but it failed miserably to crack the $45 mark. There was a glimmer of when it peaked at $47, yet it quickly fell victim to a high-volume sell-off following the rate hike announcement. So with no conclusive direction establishing itself this week and the 10-dma violations, we're taking KANA off our call list. For the readers who've been following the news, the company announced yesterday that M.A.N. Truck & Bus UK Limited has selected Kana Service to handle requests for its in-house roadside assistance program PUTS: ***** NXTL $108.69 +8.19 (+15.81) Sometimes you're the hero and sometimes the goat. NXTL dropped below $94 early on Monday, and then did an about-face, heading higher for the rest of the day. The recovery continued today, and NXTL moved strongly above the 200-dma, and then the $104 resistance level. The strong volume over the past 2 days combined with today's close near the high of the day leaves us no choice but to let NXTL go. PLCM $64.06 +7.06 (+5.69) Yesterday PLCM gave us more of the descending momentum we've seen since May 3rd. After sinking to a daily low of $52, the stock established a new line of resistance at $55 for the majority of the day. The last minute spike to $57.81 was however, unnerving. If you had an itchy trigger finger and jumped in early, your stops should have however protected the bulk of your capital before PLCM broke through the 10-dma. Honestly, the timing couldn't have been worse. First there was the upgrade from Stifel Nicolaus whose analyst upped PLCM to a Strong Buy from a Buy. And then with the broad rally today, PLCM was an easy target for bargain hunters. Without any further adieu, PLCM is a definite drop tonight. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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The Option Investor Newsletter Tuesday 5-16-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. ******************** PLAY UPDATES - CALLS ******************** SEPR $109.75 +6.75 (+7.50) The Biotech sector surged higher Tuesday. The sector benefited from a slew of positive analyst remarks. Several brokerages initiated coverage and set lofty price targets in the sector. For instance, SG Cowen initiated coverage on MLNM, GZMO, and GZTC with Strong Buy ratings. Additionally, Needham & Co initiated coverage on GILD with a Buy and set a $209 price target on MEDI. The positive analyst comments pushed SEPR past resistance at $104 with a gap higher Tuesday morning. The stock is sailing higher using its 10-dma as support. Watch for a bounce off the 10-day as a possible entry point. After clearing resistance at $104, SEPR edged up to its next resistance at $110. Watch for a move above that level as a possible entry point. Volume returned to SEPR late Tuesday as buyers scrambled to purchase the stock, watch for the buying to carry over into Wednesday and push SEPR past resistance. FAST $71.13 +0.31 (+1.75) FAST announced a major expansion agreement with OrderZone.com, a leading B2B Internet marketplace, on Monday. The agreement will extend FAST's reach into the small business markets. The commitment will further establish FAST's online presence while maintaining its strong level of customer service. Also on Monday, analysts at Robert W Baird downgraded FAST from a Strong Buy to Market Outperform. Analysts at the brokerage firm downgraded the stock because it had reached their price target. Traders quickly discounted the downgrade Monday and sent FAST higher. The stock gapped down $0.69 after the downgrade but rebounded to a new 52-week high late Monday. The momentum carried over into Tuesday's trading as FAST traced yet another 52-week high at $73.31. Look for FAST to continue its upward ascent, as it rolls to new highs. Trading activity has remained healthy while FAST has moved higher, look for a bounce off the 5-dma and confirm any rally with heavy volume. FLEX $56.25 -1.50 (+3.00) FLEX held their analyst meeting on Tuesday. Executives didn't make any major announcements, but told analysts that business remains healthy and the company is comfortable with earnings forecasts. Several analysts made positive remarks after the meeting. Prudential Securities reiterated their Strong Buy rating on the stock and Credit Suisse First Boston reiterated its Buy rating. Despite the positive comments FLEX stumbled in Tuesday's trading. The stock rallied sharply Monday, ahead of the analyst meeting. It appears Tuesday's decline is nothing more than profit taking noting the light volume and considering the strong rebound from last week. FLEX could benefit in the coming days from the strong earnings report from fellow electronics component maker Hewlett-Packard (HWP). From here, watch for a quick rebound form current levels for an entry point or wait for FLEX to clear resistance at $60. AFFX $155.13 +15.19 (+14.91) As investors sat on their hands in anticipation of today's FOMC meeting, AFFX gave us one more entry point on Monday. With an early morning drop to the $135 support level, aggressive investors who jumped on board ahead of today's economic information were amply rewarded as AFFX opened sharply higher. The rally faded a bit as the time of the interest rate announcement approached and then dropped with the broad markets in reaction to the announcement. Then, with a surge of buying volume, the stock ran up to the 50-dma (currently $154.31), and managed to push through and close above it for the first time in the past 2 months. Volume did pick up today, but is still light. Even though we had a nice gain today, it came on only two-thirds of the average daily volume. AFFX is now sitting just below the $159 resistance level and we need to see the conviction of more volume in order to push higher. New entries can be considered on a strong push through resistance or on another bounce from support at $147. CDWC $123 +3.50 (+4.75) After an impressive run like we have seen from CDWC over the past month, it appears investors may be ready for a bit of a rest. Volume is remaining strong, and if the action during the recent climb is any indication, CDWC could be consolidating in advance of the next leg up. After the usual excitement surrounding the open today, trading became almost nonexistent for the two hours leading up to the announcement on interest rates. We saw a hint of a rally beginning in the last 15 minutes of trading today, but we need to see follow through tomorrow. Remember that this is a momentum play based on the strength of the company's last earnings announcement, and excitement over a potential split. Look for a possible announcement after the May 24th Annual Shareholder meeting, where there will be a vote on increasing the number of outstanding shares. The 5-dma (currently $117.88) is continuing to provide support, and if the upward move remains intact, we would consider intraday dips as a viable entry strategy. MEDI $172.03 +9.41 (+7.53) After the announcement on Thursday that MEDI would be added to the S&P 500, our play really took off. After the first wave of excitement subsided, MEDI quickly began marching higher, and today gained over $9 on volume in excess of the ADV. In the process, buyers have pushed the stock up through the 10, 30, and 100-day moving averages. Today's close puts MEDI above the $170 resistance level and puts the stock within striking distance of the $175-180 congestion zone. If $170 fails to hold, look for support in the vicinity of $165; consider bounces near this level as good entry points so long as volume remains healthy. Now that the interest rate uncertainty has been removed, investors will be focused on the pending Shareholder Meeting on May 18th. There will be a vote on increasing the outstanding shares, and if approved, the company will proceed with its announced 3-for-1 split on the same day. Consistent with our policy of not holding over splits, we will be dropping MEDI on Thursday and we recommend closing any open positions before Thursday's close. BVSN $48.38 +2.88 (+2.63) Well, the buzz is definitely back in the bee - B2B, that is - following last week's H&Q tech conference and today's predictable 0.5% rate hike in interest rate by the Fed. We noted last night in the Wrap that leading B2B infrastructure companies would likely be one of the first to spring forward after the Fed announcement. BVSN didn't disappoint as volume ratcheted up to over 10.4 mln shares - that's 20% above the ADV. While we didn't get the breakout of the wedge we were looking for, BVSN is backed up against $50 resistance. With today's low only dipping down to $46, the convergence spring is getting highly compressed, and we would expect a breakout any day now. Again, volume is the key and today's surge looks promising. Our best suggestion is to buy the next intraday dip or wait for the clean break over $50.50 with volume. Not that the company's announcement of hosting an International Users' Forum is any price-moving news item (more like a self-congratulatory love-fest from the looks of the news release), but there could be price moving alliances or collaborations announced over the next few days as a result. MSFT $69.50 +0.13 (+0.69) Looks like we picked a good bottom on MSFT, but the stock has to move up from here in order for us to make a profit. We have to admit though with Bill Gates spotting TV commercials and Steve Ballmer penning an essay in Newsweek, the public opinion campaign is beginning to work in MSFT's favor. It doesn't hurt either that MSFT will deliver an "Outlook patch" next week to slow down Love Bug-type hacks. But in the short- term, we'd just rather see investors scooping up the issue again. Based on 24 mln shares traded today (ADV is 44 mln), and following a much awaited Fed rate hike in which the markets were "suppose" to rally, volume is not there to push MSFT higher. $65 is rock solid support, followed by $68, and $69.50 intraday. Intraday resistance isn't far off at $70.50, then $72 with a bigger hurdle at $74. Talk about rangebound! MSFT is destined to flat line in the absence of any news to push it. It's tough to day trade this movement. You can consider dips under $67 to be buyable; however, we encourage waiting for a move over $72 with renewed volume. "Buy and hope" at this level isn't a profitable strategy. SEBL $140.81 +2.94 (+11.81) Breakout!!! Pull up a chart and look at the action starting around 2:00 ET yesterday. A big move above $130 with huge volume to back it up made this a textbook breakout. It moved up to $140 where it held flat until the Fed announcement. Despite a re-test to $134 immediately following today's Fed rate hike announcement, the rebound was swift and actually pushed SEBL through $140, a previous level of resistance. Despite low overall daily volume, this is a technically bullish pattern. Why? Because not only did the move occur at a historical level of resistance, it also occurred at the 50-dma (then about $127) and held. When you have a technical wedge, historical support, and a moving average at roughly the same place, volume is a slightly less important factor in the equation for a breakout. Every technical trader in world was probably all over this one. We look for the technical trend to continue with the next resistance level at the late March (just before the first selloff) high of $147. A target shooting level of support is harder to find. But today's intraday dip into the $134-$135 might make a good target. JDSU $94.25 +4.25 (+8.25) It took only one hour to fall to the $83 area Monday morning. After that the buyers stepped in and began loading up on shares of JDSU. As we said this weekend a successful retest of the $80 to $83 area could provide a suitable entry point for a new play. This morning shares of the fiber-optics company took off right out of the gate and didn't stop until reaching $96. On the Fed announcement JDSU pulled back along with the broader market to $90 and bounced into the close. No company specific news the first two days of the new week, however it does appear as though JDSU and many of the past favorites at the Nasdaq are in favor again. The volume the past two days indicates the buyers may be back as well, at least temporarily. If the bears do try to have their way with JDSU, look for support to enter near $93, $90 or the $88 level. If you missed the bounce on Monday, don't worry. Like we've said before, this one has produced many opportunities for traders in the past and we expect more of the same this time. RMBS $207.00 +5.63 (+18.06) As RMBS fell to support near $178 early Monday morning, traders began to click on the buy button in preparation for the Fed rally. RMBS and many of the issues in the $SOX began to bounce in what would prove to be a nice start for our new play. RMBS has provided traders with move of about 10% in the past two sessions. The volume was better today with over 4.9 million shares traded. No news in particular, just an improved sentiment for the RMBS, the industry and the tech stocks as a whole. How do we proceed with our play? Well depending on the sentiment in the broad markets, we believe RMBS will continue higher. With that said, we could see a pullback to intraday support levels before the next move up. Intraday charts show support at $195. RMBS formed a nice base today near $210, prior to the Fed announcement. A move back through that level accompanied by strong volume and we could see RMBS continue its flight. If it needs a day or two for re-fueling then be patient, and look for bounces off support to enter this play. AMGN $64.69 +0.50 (+2.31) Here's another new play that's got off to a nice start for the week. Even as lawyers for the company headed back to court on Monday, the bulls charged ahead buying shares of AMGN. Lawyers for the biotech firm and Transkaryotic Therapies began battling in a District court yesterday at the opening of a patent trial whose outcome could have a dramatic impact on the whole industry. Why all the fuss? The suit could affect billions of dollars of sales of Amgen's best selling product, Epogen. TKT is trying to convince the judge that AMGN's patents are two broad. What was broad the past two days, was the number of buyers seen in the biotech company. Although less than its 3-month average, the volume has picked up the last few days, as AMGN has continued to climb higher. Technically, support is now built up at $63.50 and $62.50. As we said this weekend, AMGN is a stock that trends very nicely, once the trend has been established. Remember it normally doesn't move fast. Profit taking should be considered buying opportunities once a bounce is established as well. DNA $135.00 +3.63 (+6.00) Just what every new drug or biotech play needs, is a study to come out saying that the clot-busting drugs that a routinely given after heart attacks don't help, but could actually harm the most elderly patients. While this kind of news may not have the same kind of effect as if the company warned about poor earnings, it was encouraging to see investors not shy away from the company's stock. Perhaps investors that follow and trade the company regularly are used to Genentech being hammered with negative press. After all, it was just over a week ago Genentech warned of allergic reactions, linked to their drug Herceptin. The volume on Monday was extremely light while today's 2.7% gain showed better numbers. Traders began to pull some money off the table ahead of the Fed announcement, but return to nibble on shares of DNA going into the closing bell. Intraday support is found now at $132, $129 and near the 10-dma at $126.83. The near-term trend is higher, and we would look for chances to buy calls, however keep your stops in place. PLXS $89.25 +1.00 (+8.25) Bulls Eye! PLXS provided superb entries Monday morning with dips to near-term support at $75 and $78. Then all it could do was go up, up, up. The bullish climb was backed by a strong show of volume indicating PLXS was indeed experiencing a solid momentum run. Today PLXS not only shattered the next level of resistance at the $90 mark, but it also set another new 52-week high. The record now stands at $91.50. Near-term support is developing at $85 and $86, which is just above the 5-dma ($83). Look for entry points on dips to these levels, assuming PLXS is still on the climb. If there's a pullback in the markets and PLXS follows suit or is a victim of some profit taking, then watch for bounces off old resistance at $80. WLA $120.63 +1.31 (+3.38) Investors are getting excited about the upcoming merger of WLA and Pfizer, which is expected to be approved on Monday and completed by Wednesday, May 24th. Near- term support rose this week to $118 from $115, which is a good sign. Recall WLA still must challenge its all-time high at $126.25 (set last Monday). Another positive endorsement that WLA's momentum is again on the rise was its move through the 5 and 10 DMAs, now at $118.41 and $119.42 respectively. Additionally, now that the Fed meeting is behind us, WLA shouldn't face too much strife in the short-term. Use the intraday volatility to get your foot in the door. AMCC $113.50 +10.50 (+12.19) AMCC played right into our hands! On Monday, the stock took a dip below old resistance of $100 and provided a multitude of entry opportunities. Then analyst Cody Acree of Frost Securities came forward and upgraded AMCC to a Strong Buy from Buy. The promising finish at $103 yesterday foreshadowed the stock's $10.50, or 7.7% surge in today's session. The play's momentum effectively got a big boost as the telecom stocks rallied ahead of the key Fed meeting. The next goal is for AMCC to penetrate $120. Today it gave it a good shot, but got stopped out at $116.75. Market permitting, we're anticipating AMCC can sustain its momentum run in the short- term. As a reminder to new readers, AMCC is a fast mover so consider this play VOLATILE and HIGH-RISK. ******************* PLAY UPDATES - PUTS ******************* SBL $46.06 +0.69 (+1.00) SBL rallied in the past two days with help from several electronics makers. Computer switches maker BRCD rallied nearly 10% after reporting strong earnings and component maker LXK gained over 6% in Tuesday's trading. While the tech sector enjoyed substantial gains, SBL lagged, and gained a mere 1%. Although SBL has rebounded, the gains have come on extremely light volume. Tuesday's slight rally was on half of the stock's ADV. Worth noting, during intra-day action, the volume is much heavier during pullbacks. Suggesting institutions continue to unload the stock. Over the past two days, SBL has ran into resistance at $47 several times. Watch for SBL to bump into resistance, and look for the institutions to return and sell the stock lower. If you want a more conservative entry point, wait for SBL to fall through support at $44. Confirm any decline with above heavy volume as a sign the professionals are selling. CMRC $49.25 +2.63 (+4.88) Caution flags are going up on CMRC as it has bounced almost 20% from the low on Monday. Additionally, CMRC saw above average volume accompanying today's move. So why are we keeping it? The simple answer is resistance and sector sentiment. The 10-dma (currently $49.81) sits right above today's close and is backed up by the 30-dma at $52.31. The B2B sector continues to be under pressure due to concerns about what will be the most viable revenue model. This pressure can be seen in the charts of B2B stocks like CMRC. Many of these stocks are running into resistance at the 10-dma, while the Internet sector and the NASDAQ have broken solidly through this level. Look to initiate new positions as CMRC rolls over near resistance, preferably confirmed by increasing volume. Keep an eye on volume as the price approaches support (currently at $44 and $42); if the volume dries up, it will be a good indication that the selling may be over. FDRY $73.13 +5.69 (+5.00) The new week, has brought new buyers back to Foundry Networks. The question now becomes whether or not they are the long-term investors or short-term players. As we mentioned in previous updates, FDRY was getting so oversold, it really was due for a bounce. FDRY is now approaching its 10-dma at $78.76 which could be the failure point for any further rally. If the buying seen today has been those with a longer time frame in mind then FDRY may have out in a bottom. If not, then we are due for return trip south. On Monday FDRY announced that shipments of its NetIron400 and NetIron800 Internet backbone routers commence shipping on May 1. A company spokesman said "the explosive growth and use of the Internet is creating an enormous desire for ultra high performance, reliable and scalable data communications devices. Great comments, and we couldn't agree more, but right now what the company needs are more buyers if they expect to see the price of their stock turn around. AKAM $76.06 +1.31 (+5.56) It's looking good. AKAM didn't give us a repeat of its show-stopping performance of a couple weeks ago. The stock's reaction, or lack of it today, gives us a good indication that AKAM isn't going to throw pie in our face. While many of the Internets were in rally mode today, AKAM slammed into fierce opposition at the $80 level. The icing on the cake was the late day downdraft, which distinctly pulled it further away from the 10-dma ($82.77) and placed it in the vicinity of the descending 5-dma ($74.38). This further demonstrated that AKAM can't hold any gains. The cautious traders will want to wait for AKAM to slide under this latter technical before opening new positions. It'd be even more conservative for the stock to move to the underside of $72, like on Monday and Friday. In the news yesterday Akamai and CCBN.com, the leading provider of online investor relations services to publicly traded corporations, announced today a one-year extension to their existing streaming media agreement, which signifies both companies' belief in Webcast services. Also the company announced a partnership with Microsoft. Together they'll sponsor a series of nationwide "streaming media" seminars to educate companies on how digital media technology is changing the face of business. ************** NEW CALL PLAYS ************** ALTR - Altera Corp $92.63 +5.25 (+8.56 this week) Altera designs, manufactures, and markets programmable logic devices (PLDs). These user-friendly chips are gaining popularity over custom logic chips because it allows customers to program them themselves using software provided by Altera. As a result, it cuts development costs and time to market. The company caters to a wide range of markets including telecommunications and data communications. Is it strictly a recovery in our midst or the possibility of a split announcement that is enticing buyers? Yesterday ALTR came off its bottom at $80 and rallied in late afternoon trading. It looked promising, but still it got stopped out before it could challenge strong resistance at $90. Now today with that resistance clearly an early morning memory and ALTR instead using that $90 level as a bouncing platform, it appears the stock will attempt a charge for $100. Plus there is no doubt ALTR is a split candidate. For months the stock has been trading above historical split-levels of $70. And on Wednesday, there was a vote to increase the number of authorized shares from 400 mln to 700 mln at the company's Annual Meeting of Shareholders. A split could be announced at any time. Look for positive moves off the current share price and an increase in trading volume to signal another breakout. Entries off the converged 10-dma ($90.74) and 30-dma ($90.50) present a reasonable entrance if ALTR can hold these higher share prices. Earlier on May 8th, Altera announced it acquired privately held, Right Track CAD Corporation, an independent developer of architectural and computer aided design (CAD) tools for advanced programmable logic devices (PLDs). BUY CALL JUN- 85*LTQ-FQ OI= 550 at $13.38 SL=10.00 BUY CALL JUN- 90 LTQ-FR OI= 358 at $10.25 SL= 7.25 BUY CALL JUN- 95 LTQ-FS OI= 399 at $ 7.88 SL= 5.75 BUY CALL JUN-100 LTQ-FT OI=2090 at $ 6.25 SL= 4.25 Picked on May 16th at $92.63 P/E = 77 Change since picked +0.00 52-week high=$108.00 Analysts Ratings 14-9-5-0-0 52-week low =$ 30.00 Last earnings 03/00 est= 0.34 actual= 0.36 Next earnings 07-17 est= 0.42 versus= 0.25 Average Daily Volume = 4.36 mln /charts/charts.asp?symbol=ALTR ************* NEW PUT PLAYS ************* OPTV - OpenTV Corp. $58.75 -3.88 (-5.88 this week) OpenTV develops software for interactive digital television systems. With its software, one can use a remote control to surf TV channels, access interactive services (such as shopping, banking, and e-mail), and even control camera angles and instant replays during sporting events. The company offers integration, application development, and other services. Corporate investors include Sun Microsystems, America Online, News Corp, Motorola, and Time Warner. OpenTV plans to buy Internet software pioneer Spyglass (SPYG). Kids want their MTV, investors don't want OPTV. The stock has fallen from its lofty high of $245 over concerns of the pending SPYG acquisition. Late in March, OPTV announced it would acquire SPYG for an 80% premium. Since the announcement, investors have evacuated OPTV faster than a burning building. Analysts believe OPTV greatly overpaid for SPYG. Additionally, investors are questioning the viability of SPYG and what value, if any, the company will add to OPTV. In fact, many shareholders are calling for a vote against the merger. As if the concerns over the merger weren't enough, OPTV will face the unlocking of stock from their IPO. The lock-up period expires later this week and will bring a supply of stock to a market that has little demand for OPTV right now. In light of the concerns revolving around the merger and the expiration of the lock-up period, we're looking for OPTV to continue to slide. OPTV enjoyed a dead-cat bounce in early April after falling from grace, volume has since swelled as the selling has resumed. The stock has subsequently formed a head-and-shoulders top, and with Tuesday's decline, broke through the right shoulder. OPTV is now hovering precariously above its last major support level at $58. A move below support might position OPTV to retest its 52-week low of $41.25. Watch for a sharp move below $58 in the coming days for a possible entry point. OPTV does have one minor support level at $55. A conservative trader may consider a move below $55 as a possible entry into the play. BUY PUT JUN-60*OUZ-RL OI=31 at $10.88 SL=8.25 BUY PUT JUN-55 OUZ-RK OI=20 at $ 8.13 SL=5.75 Average Daily Volume = 534 K /charts/charts.asp?symbol=OPTV ********************** PLAY OF THE DAY - CALL ********************** MEDI - MedImmune Inc. $172.03 +9.41 (+7.53 this week) MedImmune is a biotech company focused on developing and marketing products that address medical needs in areas such as infectious disease, autoimmune disorders, cancer, and transplantation medicine. The company has six products on the market and a diverse product development portfolio. The products currently on the market include Synagis, CytoGam, RespiGam, Ethyol, Neutrexin, and Hexalen. Most Recent Write-Up After the announcement on Thursday that MEDI would be added to the S&P 500, our play really took off. After the first wave of excitement subsided, MEDI quickly began marching higher, and today gained over $9 on volume in excess of the ADV. In the process, buyers have pushed the stock up through the 10, 30, and 100-day moving averages. Today's close puts MEDI above the $170 resistance level and puts the stock within striking distance of the $175-180 congestion zone. If $170 fails to hold, look for support in the vicinity of $165; consider bounces near this level as good entry points so long as volume remains healthy. Now that the interest rate uncertainty has been removed, investors will be focused on the pending Shareholder Meeting on May 18th. There will be a vote on increasing the outstanding shares, and if approved, the company will proceed with its announced 3-for-1 split on the same day. Consistent with our policy of not holding over splits, we will be dropping MEDI on Thursday and we recommend closing any open positions before Thursday's close. Comments MedImmune broke out today after the interest rate announcement as strong volume pushed the stock above $170. This resistance level gave way because investors are buying ahead of the share holders meeting on Thursday to enact the split. The split is the same day which means Wednesday is the final day for investors to pile in to catch the split. A bounce off $170 would make the best entry point. BUY CALL JUN-165*MEQ-FM OI=1419 at $20.63 SL=15.75 BUY CALL JUN-170 MEU-FN OI= 463 at $18.50 SL=13.00 BUY CALL JUN-175 MEU-FO OI= 286 at $15.50 SL=11.00 BUY CALL JUN-180 MEU-FP OI= 205 at $13.38 SL= 9.75 BUY CALL JUN-185 MEU-FQ OI= 268 at $11.25 SL= 8.25 Picked on May 7th at $170.25 P/E = 108 Change since picked +1.78 52-week high=$228.75 Analysts Ratings 12-1-0-0-0 52-week low =$ 55.00 Last earnings 04/00 est= 0.75 actual= 0.80 Next earnings 07-19 est=-0.07 versus=-0.19 Average Daily Volume = 1.52 mln /charts/charts.asp?symbol=MEDI ************************ COMBOS/SPREADS/STRADDLES ************************ A Banner Day Indeed! Monday, May 15 Equity markets ended higher amid optimism the Federal Reserve's upcoming rate adjustment will be the last one for some time. The Dow rallied 198 points to 10,807 and the Nasdaq closed 78 points higher at 3607. The S&P 500 Index added 31 points to end at 1452. Volume on the NYSE remained very light with 853 million exchanged. Advances beat declines 1,761 to 1,144. Nasdaq trading volume was also thin with 1.15 billion shares changing hands. Advances beat declines 2,154 to 1,885. The 30-year Treasury was last up 22/32, bid at 101 8/32, pushing its yield down to 6.15%. Sunday's new plays (positions/opening prices/strategy): Nabisco NGH SEP15C/JUN20C $4.50 debit diagonal Ashland ASH JUN30C/MAY35C $4.75 debit diagonal Ashland ASH JUN30C/JUN35C $3.50 debit bull-call Best Foods BFO JUN50P/JUN55P $0.56 credit bull-put Cienna CIEN JUN85P/JUN90P $0.62 credit bull-put Nabisco surged at the open on reports that Philip Morris (MO) and others have entered the bidding for its food unit. Our original play (in May) was unavailable but with the new option interest, a short position in June offered a favorable initial cost basis. The opening debit in the Ashland diagonal spread was slightly higher than our target but we decided to take the position as it has no upside risk an offers a discounted entry into the bull call spread. We will also track the prices of the debit spread for comparison. Best Foods and Cienna both provided reasonable credits for the initial entry prices. Portfolio plays: Stocks rallied across the board Monday on the eve of a key FOMC meeting as investors bet the central bank would raise interest rates aggressively to fend off inflation and reduce the need for future increases. Tuesday will also mark the release of April's Consumer Price Index, which should be the last piece of inflation data the committee reviews before deciding how much to increase interest rates. With a number of fund managers on the sidelines, trading volume remained light but both indices ended near session highs. The Dow rose as traders vied for old economy stocks that have taken a drubbing in recent weeks and the Nasdaq staged an impressive rally amid gains in computer software and Internet issues. Large-cap technology names were the top performers and JDS Uniphase (JDSU), Sun Microsystems (SUNW) and Intel (INTC) led the rally. In the broad market, tobacco, insurance and investment management stocks advanced while Air freight, waste management and textiles moved lower. Our portfolio benefited from the strong move in technology issues and the majority of plays in that group are now profitable. The leader in today's session was Applied Materials (AMAT) with a $5 rally to end near $86. Our bullish credit spread offers maximum return above $80. General Electric (GE) and Warner Lambert (WLA) led the big-cap safety issues and Medtronics (MDT) led the mid-cap group rising $2.50 to $56.50. The surprise mover was Excite@home (ATHM) with a $2 rally to end at a recent high near $22. Our new debit spread is almost $5 in-the-money after just one week in play. Stocks in the Oil industry continue to perform very well and many of our positions have far exceeded original expectations. Smith International (SII), Texaco (TX), Tuboscope (TBI) and Unocal (UCL) were the big movers. The calendar spreads portfolio has been one of our favorites in recent weeks and today the success continued. Dean Foods (DF) and Magna International (MGA) both moved higher, bringing their respective positions to maximum profit, well above the target returns. Tuesday, May 15 The market rallied Tuesday as investors applauded the hike in interest rates by the Federal Reserve. The Dow finished up 126 points at 10,934 and the Nasdaq was up 109 points at 3717. The S&P 500 Index added 13 points to close at 1466. Volume on the NYSE hit 955 million shares with advances beating declines 1,675 to 1,269. Trading volume on the Nasdaq was active with 1.49 billion shares exchanged. Technology advances beat declines 2,337 to 1,750. The 30-year Treasury was last up 18/32, bid at 101 27/32, pushing its yield down to 6.11%. Portfolio plays: Stocks finished higher today after the FOMC raised interest rates by one-half point, the biggest increase in five years. The Fed said it was increasing the federal funds rate, the interest that banks charge each other on overnight loans to offset a rapidly growing economy that could foster inflationary imbalances and possibly undermine its future performance. Most analysts had expected today's 50-basis point hike, demonstrating that the Fed was prepared to move more aggressively to dampen the current economic pace. The record-breaking growth has shown little sign of diminishing but a report by the Labor Department may be seen as favorable news. For the first time in almost a year, the CPI or Consumer Price Index was unchanged in April, matching many analysts' expectations. Now the question is how the increase in interest rates will affect the booming economy, which has grown at a sizzling rate, well above 5% in the first three months of 2000. It was indeed a "Super Tuesday" for the Spreads/Combos portfolio with a number of issues rallying in expectation of the interest rate announcement. Adobe Systems (ADBE) with the big winner with a $14 rally to a recent high near $123. Ciena (CIEN) was another well-known issue on the leader-board, up $11.25 to close at $152. Applied Materials (AMAT), Computer Associates (CA), Cypress (CY) and Teradyne (TER) rounded out the top issues in the technology group. Safety stocks performed well and the Major Drug sector produced a number of winners. Sepracor (SEPR) led the group with a $6.75 rally but Abgenix (ABGX), Johnson & Johnson (JNJ), and Warner Lambert (WLA) were not far behind. A number of small-cap positions benefited from the bullish activity and Oxford Health (OXHP) was the best performer in that category. Andrew (ADRW), Cabletron (CS), Cypress (CY) and Network Associates (NETA) also moved higher on today's upward momentum. With only three days to go, it appears that May will be a banner month for the portfolio with roughly 90% of the current plays providing a positive return. There are a few issues that require attention but without a major correction, the Combos section will will finish the expiration period on a positive note. There are a few adjustments that need to be made in the long-term positions but for the majority of plays, we will simply wait for Friday's closing bell. Let's hope there are no surprises... Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** ALL - Allstate $26.00 *** Up On Speculation! *** The Allstate Corporation is engaged in the property-liability insurance and life insurance and savings businesses. Allstate's Property-Liability insurance business consists of the PP&C and Discontinued Lines and Coverages segments. PP&C writes private passenger auto and homeowners insurance policies in 50 states, the District of Columbia, Puerto Rico, Canada and Germany. Discontinued Lines and Coverages consists of business no longer written by the company, including results from environmental, asbestos and mass tort losses, mortgage pool insurance business and other commercial insurance business in run-off, as well as the historical results of the commercial/reinsurance businesses sold in previous years. Life insurance products include whole life and term life insurance as well as universal life, variable life and other life products. Savings products include deferred annuities and immediate annuities. ALL's Group pension products include guaranteed investment contracts and retirement annuities. The recent merger and acquisition speculation has found its way to Allstate and the stock has rallied on the news. Rumors have surfaced of potential acquisitions in the financial services group and investors quickly opened new positions in issues they believe are possible candidates. Option trading has been active in Allstate and Implied Volatility remained high in heavy volume this week as the speculation spread. A number of insurers and banks were mentioned as possible suitors including American International Group (AIG). With the recent change in technical character, this play offers an excellent way to participate in the bullish, merger speculation. This position is based on recent increased activity in the stock and underlying options. The position offers favorable risk/reward potential for those who are bullish on the issue but as with any speculative play, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/debit spread): BUY CALL JUN-20.00 ALL-FD OI=117 A=$6.25 SELL CALL JUN-22.50 ALL-FX OI=490 B=$4.00 INITIAL NET DEBIT TARGET=$2.00-$2.12 ROI(max)=17% B/E=$22.12 Chart = /charts/charts.asp?symbol=ALL ***** CCU - Clear Channel Communications $76.19 *** Merger-Mania! *** Clear Channel Communications is a diversified media company with two business segments, broadcasting and outdoor advertising. The broadcasting segment includes both radio and television stations for which the company is the licensee and radio and television stations for which it programs and/or sells air time under local marketing agreements or joint sales agreements. The broadcasting segment also operates radio networks. The outdoor advertising segment includes advertising display faces for which the company owns and/or operates under lease management agreements. Radio and Television has been a strong sector among media shares in recent weeks and CCU is one of the top companies in the group. Today the company announced that sports and entertainment promoter SFX Entertainment (SFX) has agreed to settle pending shareholder lawsuits, clearing the way for its planned merger with CCU. With approval of the transaction by SFX's stockholders, the merger is expected to close early in the third quarter of 2000. This move follows another recent acquisition agreement with AM/FM Inc. (AFM) and both deals are expected to significantly advance CCU's industry-leading position. There are two ways to participate in the bullish trend of the issue. First with CCU options: PLAY (aggressive - bullish/credit spread): BUY PUT JUN-65 CCU-RM OI=2 A=$0.81 SELL PUT JUN-70 CCU-RN OI=95 B=$1.68 INITIAL NET CREDIT TARGET=$1.00 ROI(max)=25% B/E=$69.00 Chart = /charts/charts.asp?symbol=CCU Or with AFM ($70.31) options: PLAY (conservative - bullish/credit spread): BUY PUT JUN-55 AFM-RK OI=0 A=$0.56 SELL PUT JUN-60 AFM-RL OI=0 B=$1.00 INITIAL NET CREDIT TARGET=$0.56 ROI(max)=12% B/E=$59.43 Chart = /charts/charts.asp?symbol=AFM ***** DITC - Ditech $110.00 *** On The Move! *** Ditech designs, develops and markets equipment used in building and expanding telecommunications and cable communications networks. Their products fall into two categories: echo cancellation equipment and equipment that enables and facilitates communications over fiber optic networks. Ditech's echo cancellation products eliminate echo, which is a significant problem in existing and emerging networks. Their optical communications products enable the implementation of wavelength division multiplexing technology, which is becoming more widely adopted by service providers to address network capacity constraints. Ditech's optical communications products are designed to function either as stand-alone products or as a complete system known as the Optical Path Solution. The Ditech recovery began in mid-April and culminated in a $16 rally over the last two days. With the Fed's inflation-fighting bias now well known and the interest rate decision out of the way, many of the leading technology issues will demonstrate their dominance over lesser companies in the industry. Based on the outlook for telecom equipment companies, Ditech is one of the top growth prospects in the group. The technical character of the issue appears to support a bullish trend in the short-term and we are going to speculate on that optimistic forecast with a conservative, credit spread position. This play is based on the current price or trading range of the underlying issue and its recent technical history or trend. Current news and market sentiment will have an effect on this issue. Review the play thoroughly and make your own decision about the future outcome of the position. PLAY (conservative - bullish/credit spread): BUY PUT JUN-65 DUI-RM OI=0 A=$0.93 SELL PUT JUN-75 DUI-RO OI=11 B=$1.88 INITIAL NET CREDIT TARGET=$1.12-$1.25 ROI(max)=12% B/E=$73.88 Chart = /charts/charts.asp?symbol=DITC ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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